Description

Description
Test Bank Auditing Assurance Services 14th Arens, Elder & Beasley
Chapter 1: The Demand for Audit and Other Assurance Services

1) The Sarbanes-Oxley Act applies to which of the following companies?
A) All companies.
B) Privately held companies.
C) Public companies.
D) All public companies and privately held companies with assets greater than $500
million.
3) Evidence is paramount to audit and attestation engagements. List the four basic
types of audit evidence.
4) The criteria by which an auditor evaluates the information under audit may vary
with the information being audited.
A) True B) False
5) The criteria used by an external auditor to evaluate published financial statements
are known as generally accepted auditing standards.
A) True B) False
6) The Sarbanes-Oxley Act establishes standards related to the audits of privately held
companies.
A) True B) False
7) The Sarbanes-Oxley Act is widely viewed as having ushered in sweeping changes
to auditing and financial reporting.
A) True B) False
8) Only companies that file annual statements with the Securities and Exchange
Commission are required to have an annual external audit.
A) True B) False
9) Recording, classifying, and summarizing economic events in a logical manner for
the purpose of providing financial information for decision making is commonly
called:
A) finance.
B) auditing.
C) accounting.
D) economics.
10) Which department provides quantitative information in order for management and
others to make decisions?
A) management information systems.
B) auditing.
C) finance.
D) accounting.
11) In “auditing” financial accounting data, the primary concern is with:
A) determining whether recorded information properly reflects the economic events
that occurred during the accounting period.
B) determining if fraud has occurred.
C) determining if taxable income has been calculated correctly.
D) analyzing the financial information to be sure that it complies with government
requirements.
12) The trait that distinguishes auditors from accountants is the:
A) auditor’s ability to interpret accounting principles generally accepted in the United
States.
B) auditor’s education beyond the Bachelor’s degree.
C) auditor’s ability to interpret FASB Statements.
D) auditor’s accumulation and interpretation of evidence related to a company’s
financial statements.
13) Discuss the differences and similarities between the roles of accountants and
auditors. What additional expertise must an auditor possess beyond that of an
accountant?
14) risk reflects the possibility that the information upon which the business decision
was made was inaccurate.
A) Client acceptance
B) Information
C) Business
D) Control
15) The use of the Certified Public Accountant title is regulated by:
A) the federal government.
B) state law through a licensing department or agency of each state.
C) the American Institute of Certified Public Accountants through the licensing
departments of the tax and auditing committees.
D) the Securities and Exchange Commission.
16) Financial statement users often receive unreliable financial information from
companies. Which of the following is not a common reason for this?
A) Complex exchange transactions.
B) Voluminous data.
C) Remoteness of information.
D) Each of these choices is a common reason for unreliable financial information.
17) Explain what is meant by information risk, and list the four causes of this risk.
18) An audit of historical financial statements is most often performed to determine
whether the: A) organization is operating efficiently and effectively.
B) entity is following specific procedures or rules set down by some higher authority.
C) management team is fulfilling its fiduciary responsibilities to shareholders.
D) none of these choices
19) In the audit of historical financial statements, what accounting criteria is most
common?
A) Regulatory accounting principles.
B) International financial reporting standards.
C) Generally accepted accounting principles.
D) B and C
E) All of the above.
20) Any service that requires a CPA firm to issue a report about the reliability of an
assertion that is made by another party is a(n):
A) accounting and bookkeeping service.
B) attestation service.
C) assurance service.
D) tax service.
Chapter 2: The CPA Profession

1) The legal right to perform audits is granted to a CPA firm by regulation of:
A) each state.
B) the Financial Accounting Standards Board (FASB).
C) the American Institute of Certified Public Accountants (AICPA).
D) the Audit Standards
2) The four categories for describing the size of audit firms include: the Big Four
international firms; national firms; regional and local firms; and small firms. Which of
the following is not a characteristic of a small firm?
A) Most have fewer than 25 professionals.
B) They perform audits on small and not-for-profit businesses.
C) Tax services are more important to their practice than auditing.
D) They do not audit publically traded companies.
3) Sarbanes-Oxley and the Securities Exchange Commission restrict auditors from
providing many consulting services to their publically traded audit clients. Which of
the following is true for auditors of publically traded companies? I. They are restricted
from providing consulting services to privately held companies. II. There is no
restriction on providing consulting services to non-audit clients.
A) I only B) II only C) I and II D) Neither I or II
4) Which of the following statements is true as it relates to limited liability
partnerships?
A) Only senior partners are liable for the partnership’s debts.
B) Partners have no liability in a limited liability partnership arrangement.
C) Partners are personally liable for the acts of those under their supervision.
D) All partners must be AICPA members.
5) List and describe the three factors that influence the organizational structure of all
CPA firms. What are the most common forms of CPA firm organization?
6) List and describe the six organizational structures available to CPA firms.
7) Many small/local accounting firms do not perform audits as their primary services
to their clients include accounting and tax.
A) True B) False
8) All of the Big Four and many of the smaller CPA firms now operate as Limited
Liability Partnerships.
A) True B) False
9) Sarbanes-Oxley and the Securities Exchange Commission restrict auditors from
providing many consulting services to their publically traded audit clients.
A) True B) False
10) Limited liability companies are structured and taxed like a general partnership,
but their owners have limited personal liability similar to that of a general corporation.
A) True B) False
11) The organization that is responsible for providing oversight for auditors of public
companies is called the .
A) Auditing Standards Board.
B) American Institute of Certified Public Accountants.
C) Public Oversight Board.
D) Public Company Accounting Oversight Board.
12) Members of the Public Company Accounting Oversight Board are appointed and
overseen by:
A) the U.S. Congress.
B) the American Institute of Certified Public Accountants.
C) the Auditing Standards Board.
D) the Securities and Exchange Commission.
13) The Public Company Accounting Oversight Board:
A) perform inspections of the quality controls at audit firms that audit public
companies.
B) establish auditing standards that must be followed by CPAs on all audits.
C) oversee auditors of private companies.
D) perform any of the above functions.
14) Assume the Public Company Accounting Oversight Board (PCAOB) identifies a
violation during its inspection of a registered accounting firm. The PCAOB:
A)
can enforce disciplinary
action against the accounting firm report the matter to the
Securities and Exchange
Commission suspend the license to
practice of the CPA
guilty of the violation
Yes Yes Yes
B)
action against the accounting firm report the matter to the
practice of the CPA
Yes Yes No
C)
action against the
accounting firm report the matter to the
practice of the CPA
Yes No No
D)
action against the
accounting firm report the matter to the
practice of the CPA
No No No
15) The Sarbanes-Oxley Act established the Public Company Accounting Oversight
Board (PCAOB). What are the PCAOB’s primary functions? Who performed these
functions prior to the PCAOB?
16) The Public Company Accounting Oversight Board (PCAOB) provides oversight
to auditors of publically traded and private companies.
A) True B) False
17) All CPA firms registered with the PCAOB are required to undergo a peer review
annually.
A) True B) False
18) The form that must be completed and filed with the Securities and Exchange
Commission whenever a company experiences a significant event that is of interest to
public investors is the:
A) Form S-1.
B) Form 8-K.
C) Form 10-K.
D) Form 10-Q.
19) The form that must be filed with the Securities and Exchange Commission
whenever a company plans to issue new securities to the public is the:
A) Form S-1. B) Form 8-K. C) Form 10-K. D) Form 10-Q.
20) The AICPA has authority to establish standards and rules in all but which of the
following areas?
A) Auditing standards applicable to financial statements of private companies
B) Compilation and review standards
C) Professional conduct
D) Auditing standards applicable to financial statements of private and public
companies
Chapter 3: Audit Reports

1) An audit of historical financial statements most commonly includes the:
A) balance sheet, statement of retained earnings, and the statement of cash flows.
B) income statement, the statement of cash flows, and the statement of net working
capital.
C) statement of cash flows, balance sheet, and the statement of retained earnings.
D) balance sheet, income statement, and the statement of cash flows.
2) Auditing standards require that the audit report must be titled and that the title
must:
A) include the word “independent.”
B) indicate if the auditor is a CPA.
C) indicate if the auditor is a proprietorship, partnership, or incorporated.
D) indicate the type of audit opinion issued.
3) To emphasize the fact that the auditor is independent, a typical addressee of the
audit report could be:
A)
Company Controller Shareholders Board of Directors
No Yes Yes
B)
No No Yes
C)
Yes Yes No
D)
Yes No No
4) The scope paragraph of the standard unqualified audit report states that the audit is
designed to:
A) discover all errors and/or irregularities.
B) discover material errors and/or irregularities.
C) conform to generally accepted accounting principles.
D) obtain reasonable assurance whether the statements are free of material
misstatement.
5) The audit report date on a standard unqualified report indicates:
A) the last day of the fiscal period.
B) the date on which the financial statements were filed with the Securities and
Exchange Commission.
C) the last date on which users may institute a lawsuit against either client or auditor.
D) the last day of the auditor’s responsibility for the review of significant events that
occurred subsequent to the date of the financial statements.
6) The standard audit report refers to GAAS and GAAP in which paragraphs?
A)
GAAS GAAP
Scope only Opinion only
B)
GAAS GAAP
Intro only Scope and Opinion
C)
GAAS GAAP
Intro and Scope Opinion only
D)
GAAS GAAP
Intro only All paragraphs
7) Which of the following is not explicitly stated in the standard unqualified audit
report?
A) The financial statements are the responsibility of management.
B) The audit was conducted in accordance with generally accepted accounting
principles.
C) The auditors believe that the audit provides a reasonable basis for their opinion.
D) An audit includes assessing the accounting estimates used.
8) If an auditor performs an audit of a public company, the scope paragraph should
make reference to which standards?
A) GAAP.
B) GAAS.
C) Standards issued by the PCAOB (U.S.).
D) International Audit Standards.
9) The introductory paragraph of the standard audit report states that the financial
statements are: A) the responsibility of the auditor.
B) the responsibility of management.
C) the joint responsibility of management and the auditor.
D) none of the above.
10) The introductory paragraph of the standard audit report performs which
functions?
I. State the CPA has performed an audit.
II. Lists the financials being audited.
III. States the financials are the responsibility of the auditor.
A) I and II B) I and III C) II and III D) I, II and III
11) Which of the following statements are true?
I. The introductory paragraph states that management is responsible for the
preparation and content of the financial statements.
II. The scope paragraph states that the auditor evaluates the appropriateness of those
accounting principles, estimates, and financial statement disclosures.
A) I only B) II only C) I and II D) Neither I nor II
12) The introductory paragraph of the standard audit report states that the auditor is:
A) responsible for the financial statements and the opinion on them.
B) responsible for the financial statements.
C) responsible for the opinion on the financial statements.
D) jointly responsible for the financial statements with management.
13) If the balance sheet of a company is dated December 31, 2011, the audit report is
dated February 8, 2012, and both are released on February 15, 2012, this indicates that
the auditor has searched for subsequent events that occurred up to:
A) December 31, 2011. B) January 1, 2012. C) February 8, 2012. D) February 15,
2012.
14) Which of the following is true concerning financial statements issued by a U.S.
entity to the Securities and Exchange Commission?
A) Financial statements can be prepared using International Financial Reporting
Standards.
B) The United States now allows an auditor to perform an audit of financial
statements of a U.S. entity in accordance with both GAAS and International Audit
Standards.
C) The United States only allows an auditor to perform an audit of financial statement
of an entity in accordance with GAAS if they are using International Financial
Reporting Standards.
D) An audit that uses both the GAAS and International Audit standards must modify
the scope paragraph to include both sets of standards.
15) Most auditors believe that financial statements are “presented fairly” when the
statements are in accordance with GAAP, and that it is also necessary to:
A) determine that they are not in violation of FASB statements.
B) examine the substance of transactions and balances for possible misinformation.
C) review the statements using the accounting principles promulgated by the SEC.
D) assure investors that net income reported this year will be exceeded in the future.
16) In which of the following situations would the auditor most likely issue an
unqualified report?
A) The client valued ending inventory by using the replacement cost method.
B) The client valued ending inventory by using the Next-In-First-Out (NIFO) method.
C) The client valued ending inventory at selling price rather than historical cost.
D) The client valued ending inventory by using the First-In-First-Out (FIFO) method,
but showed the replacement cost of inventory in the Notes to the Financial
Statements.
17) Brown Co.’s financial statements adequately disclose uncertainties that concern
future events, the outcome of which are not reasonably estimable. The auditor’s report
should be a(n):
A) unqualified opinion. B) disclaimer. C) qualified opinion. D) adverse opinion.
18) An audit report prepared by Garrett and Brown, CPAs, is provided below. The
audit for the year ended December 31, 2012 was completed on March 1, 2013, and the
report was issued to Javlin Corporation, a private company, on March 13, 2013. List
any deficiencies in this report. Do not rewrite the report.
We have examined the accompanying financial statements of Dalton Corporation as
of December 31, 2012. These financial statements are the responsibility of the
company’s management. Our responsibility is to express an opinion on these
statements based on our audit.
We conducted our audit in accordance with generally accepted accounting principles.
Those principles require that we plan and perform the audit to provide reasonable
assurance about whether the financial statements are free of misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, except for the effects of not capitalizing certain lease obligations that
should be capitalized in order to conform with generally accepted accounting
principles, the financial statements referred to above present accurately the financial
position of Jacob Corporation as of December 31, 2012, in conformity with
accounting principles generally accepted in the United States of America.
Garrett and Brown, CPAs March, 2013
19) Describe the standard unqualified report to be issued for an audit of a private
company. Begin by specifying the seven parts of the report, and then discuss the
contents of each part.
20) Presented below is an independent auditor’s report for a private company
prepared by the firm of Harrington and Perry, LLP.
Auditor’s Report
To the president and management of EPM, Inc.
We have examined the accompanying balance sheets and statements of income,
retained earnings, and cash flows of EPM, Inc., as of December 31, 2012 and 2011.
We performed our examination in accordance with auditing standards generally
accepted in the United States of America and examined, on a test basis, evidence
supporting the accounting principles used and estimates made by management.
In our opinion, the financial statements referred to above accurately present the
financial position of EPM, Inc., in conformity with generally accepted accounting
principles.
Harrington and Perry, LLP December 31, 2012
Other information:
EPM, Inc., is a for-profit corporation and publishes comparative financial statements
for distribution to shareholders, potential investors, and the general public. The client
has a calendar year-end. For the most recent audit, the auditor completed all
significant fieldwork on March 5, 2013 and issued the audit report on March 16,
2013. During 2012, EPM changed its method of depreciating long-term assets and
properly reflected the effect of the change in the current year’s financial statements,
restated the prior year’s financial statements, and properly discussed the change in a
footnote (Note 4) to those statements. The auditors are satisfied that the change was
preferable.
Required:
Consider all the facts given and rewrite the complete auditor’s report, including report
title, address, body of report, name of firm, and audit report date.
Chapter 4: Professional Ethics

1) The under lying r eason for a code o f pr ofessional conduct for any pr ofession is:
A) the need for public confidence in the quality of ser vice of the pr ofession.
B) that it pr ovides a safeguar d t o keep unscr upulous people out.
C) that it is r equir ed by feder al legislation.
D) that it allow s licensing agencies to have a yar dstick to measur e deficient
behavior.
2) W hich of the follow ing statements is tr ue when the CPA has been engaged to p er
for m an audit of financial statements?
A) The CP A fir m is engaged and paid by the client; ther efor e, the fir m has pr
imary responsibility t o be an advocate for the client.
B) The CPA fir m is engaged and paid by the client, but the pr imary beneficiar ies of
the audit ar e those w ho r ely on the financial statements.
C) Should a situation ar ise w her e ther e is no convincing author itative standar d a
vailable, and ther e is a choice of actions which could impact a client’s financial
statements, the CPA is fr ee to endor se the choice w hich is in the investors’ inter
ests.
D) The CP A fir m has pr imary r esponsibility to the FASB.
3) Explain w hy ther e is a special need for ethical conduct in the auditing pr ofession.
4) W hich of the follow ing is(ar e) tr ue concer ning the Ethical Pr inciples of the
Code of P rofess ional Conduct ?
I. They identify ideal conduct.
II. They ar e gener al ideals and difficult to enfor ce.
A) I only
B) II only
C) I and II
D) N either I nor II
5) W hich of the follow ing is not one o f the four par ts of the AICPA’s Code o f Pr
ofessional Conduct?
A) Pr inciples
B) Rules o f Conduct
C) Inter pr etations
D) Definitions
6) One of the AICPA’s Ethical Pr inciples deals w ith the public inter est. It states that
member s should accept the obligation to act in a w ay that w ill:
A)
Honor the public tr ust Ser ve the client’s inter est

Yes Yes
B)

No No
C)
Honor the pub lic tr ust Ser ve the client’s inter est
Yes No
D)

No Yes
7) Accor ding to the Pr inciples section of the Code of Pr ofessional Conduct, all
member s:
A) should be ind ependent in fact and in appear ance at all times.
B) in public pr actice should be independent in fact and in appear ance at all times.
C) in public pr actice should be independent in fact and in appearance w hen pr
oviding auditing and other attestations ser vices.
D) in public pr actice should be independent in fact and in appear ance when pr
oviding auditing, tax, and other attestation services.
8) W hich of the follow ing statements best descr ibes the enfor ceability of the Inter
pr etations of the Rules of Conduct?
A) The Inter pr etations ar e not enfor ceable.
B) The Inter pr etations ar e enfor ceable.
C) Th e Inter pr etations may be enfor ceable if they have been r eview ed and appr
oved by the AICPA’s Division of Pr ofessional Ethics.
D) The Inter pr etations ar e not enfor ceable, but a pr a ctitioner must j ustify depar
tur e fr om them.
9) Of the four par ts of the AICPA’s Co de of Pr ofessional Conduct , w hich par t is
enfor ceable?
A) Ethical Rulings
B) Rules o f Conduct
C) Pr inciples
D) Inter pr etations
10) Ethical Rulings ar e:
I. Explanations r elating to br oad hypothetical cir cumstances. II. Not enfor ceable,
but one must j ustify depar tur e. III. Explanations r elating to specific factual cir
cumstances.
A) I and II B) I and III C) II and III D) I, II, and III
11) The A ICP A’s Co de of Pr ofessional Conduct r equir es independence for all:
A) attestation engagements.
B) ser vices per for med by accountants in public pr actice.
C) accounting and auditing ser vices per formed.
D) pr ofessional w or k per for med by CPAs.
12) A member fir m of the A ICP A is not only r esponsible for its complianc e w ith
the Rules of Conduct, but it is also r esponsible for compliance by its:
A)
Employees Shar eholders

Yes Yes
B)

Yes Yes
C)

Yes Yes
D)

Yes Yes
13) Four of the six Ethical Pr inciples in the AICP A’s Code of P rofess ional Conduct
ar e equally applicable to all members of the A ICPA . W hich of the follow ing pr
inciples applies only to members in public pr actice?
A) Scop e and Natur e of S er vices
B) Integr ity
C) Due Car e
D) The Public Inter est
14) The Code of Pr ofessional Conduct is established by the membership of the
AICPA, and the Inter pr etations of the Rules of Conduct ar e pr epar ed by the:
A) Financial Accounting Standar ds Boar d.
B) Secur it ies and Exchange Commission.
C) CPA lic ensing agencies w ithin each state.
D) Pr ofessional Ethics Executive Committee of the AICPA .
15) Identify and descr ibe each of the four par ts to the AICP A’s Code of P rofess
ional Conduct . Also discuss w hich parts ar e officially enfor ceable and w hich ar e
not.
16) Br iefly descr ibe the advantages and disadvantages of a cod e o f conduct based
on gener al statements of ideal c onduct as opposed to specific r ules that define
unacceptable behavior .
17) W hat ar e the six Ethical Pr inciples stated in the Code of P rofess ional Conduct
? Br iefly discuss each pr inciple. Ar e these pr inciples enfor ceable?
18) An advantage of specific r ules in the Code of P rofess ional Conduct is the enfor
ceability of minimum behavior and per for mance standar ds.
A) Tr ue B) False
19) The Sar banes-Oxley Act per mits the auditor to per for m a w ide var iety of non -
audit ser vices for audit clients.
A) Tr ue B) False
20) An advantage of the pr inciples of pr ofessional conduct in the Code of P rofess
ional Conduct is that they ar e mor e easily enfor ced than ar e the specific r ules of
conduct.
A) Tr ue B) False
Chapter 5: Legal Liability

1) A(n) _____ _ failur e occur s w hen an auditor issues an err oneou s opinion
because it failed to comply w ith r equir ements of auditing standar ds.
A) business B) audit C) ethics D) pr ocess
2) Distinguish between what is meant by business failur e and audit failur e.
3) Audit r isk is the r isk ther e w ill be an audit failur e for a given audit engagement.
A) True B) False
4) The ter m “audit failur e” r efer s to the situation w hen the auditor has follow ed
auditing standar ds yet still fails to discover that the client’s financial statements ar e
materially misstated.
A) True B) False
4) In the per for mance of an audit, a CPA:
A) is legally liable for not detecting client fraud.
B) must str ictly follow GAAS for pr ivately held clients.
C) must str ictly follow PCAOB auditing standar ds for publicly held clients.
D) must exer cise due pr ofessional car e in the per for mance of their audit r
esponsibilities.
5) Auditor s w ho fail to exer cise due car e in their per for mance of pr ofessional ser
vices may be liable for :
A) punitive liability.
B) br each of contr act.
C) excess liability.
D) cr iminal char ges.
6) Recklessness in the case of an audit is pr esent if the auditor knew an adequate
audit w as not done but still issued an opinion, even though ther e w as no intent to
deceive financial statement user s. This descr iption is the legal ter m for :
A) or dinar y negligence. B) gr oss negligence. C) constr uctive fr aud. D) fr aud.
7) The standar d of due car e to w hich the auditor is expected to adher e to in the per
for mance of the audit is r efer r ed to as the:
A) pr udent per son concept.
B) common law doctr ine.
C) du e car e concept.
D) vigilant per son concept.
8) Auditor s may be liable to their clients for :
A)
Punitive damages Compensatory damages
Yes Yes
B)

No No
C)
Yes No
D)

No Yes
9) Under the law s of agency, par tner s of a CPA fir m may be liable for the w or k of
other s on w hom they r ely. This w ould not include:
A) employees of the CPA fir m.
B) employees of the audit client.
C) other CPA fir ms engaged to do par t of the audit w or k.
D) specialists employed by the CPA fir m to pr ovide technical advice on the audit.
10) “Absence of r easonable car e that can be expected o f a p er son in a set of cir
cumstances” defines:
A) p ecuniar y negligence.
B) gr oss negligence.
C) extr eme negligence.
D) or dinar y negligence.
11) An example of a br each of contr act w ould likely include:
A) an auditor ‘s r efusal to r etur n the client’s gener al ledger book until the client
paid last year ‘s audit fees.
B) a bank’s claim that an auditor had a duty to uncover mater ial er r or s in financial
statements that had been r elied on in making a loan.
C) a CPA fir m’s failur e to complete an audit on the agr eed -upon date because the
fir m ha d a backlog of other w or k w hich was mor e lucrative.
D) an auditor ‘s claim that the client staff is unqualified.
12) Pr ivity of contract exists betw een:
A) auditor and the feder al gover nment.
B) auditor and thir d parties.
C) auditor and client.
D) auditor and client attor ney.
13) An individual w ho is n ot party to the contr act betw een a CPA and the client,
but w ho is known by both and is intended to r eceive cer tain benefits fr om the contr
act is known as:
A) a thir d party.
B) a common law inher itor .
C) a tor t.
D) a thir d-party beneficiary.
14) Law s that have been passed by the U.S. Con gr ess and other gover nmental units
ar e:
A) statut or y laws. B) j udicial law s. C) fed er al law s. D) common law s.
15) The assessment against a defendant of the full loss suffer ed by a plaintiff regar
dless of the extent to w hich other parties shar ed in the wr ongdoing is called:
A) separ ate and pr oportionate liability.
B) shared liability.
C) unitary liability.
D) joint and sever al liability.
16) The assessment against a defendant of that por tion of the damage caused by the
defendant’s negligence is called:
A) separ ate and pr oportionate liability.
B) j oint and several liability.
C) shar ed liability.
D) unitar y liability.
17) Audit fr aud occur s when:
A) a misstatement is made and ther e is both know ledge of its falsity and the intent to
deceive.
B) a misstatement is made and ther e is know ledge o f its falsity but no intent to
deceive.
C) the auditor lacks even slight car e in the per for mance in per for ming the audit.
D) the auditor has an absence of r easonable car e in the per for mance of the audit.
18) W hich of the follow ing most accurately descr ibes c onstr uctive fr aud?
A) Absence of r easonable car e
B) Lack of slight car e
C) Know ledge and intent to deceive
D) Extr eme or unusual negligence w ithout the intent to deceive
19) W hich of the follow ing most accurately descr ibes fr aud?
A) Absence of r easonable car e
B) Lack of slight car e
C) Know ledge and intent to deceive
D) Extr eme or unusual negligence w ithout the intent to deceive
20) A thir d-party beneficiary is one w hich:
A) has failed to establish legal standing befor e the cour t.
B) do es not have pr ivity of contract and is unknow n to th e contr acting parties.
C) d oes not have pr ivity of contract, but is know n to the contr acting parties and
intended to benefit under the contr act.
D) may establish legal standing befor e the cour t after a contr act has been
consummated.
Chapter 6: The CPA Profession

1) The obj ective of the or dinary audit of financial statements is the expr ession of an
opinion on:
A) the fair ness of the financial statements in all mater ial r espects.
B) the accur acy of the financial statements.
C) the accur acy of the annual r eport.
D) the accur acy of the balance sheet and income statement.
2) If the auditor believes that the financial statements ar e not fair ly stated or is
unable to reach a conclusion because of insufficient evidence, the auditor :
A) should w ithdraw fr om the engagement.
B) should r equ est an incr ease in audit fees so that mor e r esour ces can be used to
conduct the audit.
C) has the r esponsibility of notifying financial statement users thr ough the auditor ‘s
report.
D) should notify r egulator s of the cir cumstances.
3) Auditor s accumulate evidence to:
A) d efend themselves in the event of a law suit.
B) j ustify the conclusions they have other wi se r eached.
C) satisfy the r equir ements of the Secur ities Acts of 1933 and 1934.
D) enable them to r each conclusions about the fair ness of the financial statements.
4) The r esponsibility for adopting sound accounting policies and maintaining
adequate internal contr ol r ests w ith the:
A) boar d of dir ector s.
B) company management.
C) financial statement auditor .
D) company ‘s inter nal audit department.
5) If the auditor insists on financial statement disclosur es that the management finds
unacceptable, the auditor can:
A)
Issue an adver se audit r epor t Issue a qualified audit r epor t

Yes Yes
B)

No No
C)

Yes No
D)

No Yes
6) In cer tifying their annual financial statements, the CEO and CFO of a public
company cer tify that the financial statements comply w ith the r equir ements of:
A) G AAP.
B) the Sar banes-Oxley Act.
C) the Secur ities Exchange Act of 1934.
D) G AAS.
7) W hich of the follow ing statements is tr ue of a public company’s financial
statements?
A) Sar banes-Oxley r equir es the CEO only to cer tify the financial statements.
B) Sar banes-Oxley r equir es the CFO only to cer tify the financial statements.
C) Sar banes-Oxley r equir es the CEO and CFO to c er tify the financial statements.
D) Sar banes-Oxley neither r equir es the CEO nor the CFO to cer tify the financial
statements.
8) The r esponsibility for the pr epar ation of the financial statements and the
accompanying footnotes belongs to:
A) the auditor .
B) management.
C) both management and the auditor equally.
D) management for the statements and the auditor for the notes.
9) Responsibility for the fair pr esentation of financial statements r ests equally w ith
management and the auditor .
A) Tr ue B) False
10) The auditor ‘s best defense w hen mater ial misstatements ar e not uncover ed is to
have conducted the audit:
A) in accor dance w ith gener ally accepted auditing standar ds.
B) as effectively as r easonably possible.
C) in a timely manner .
D) only after an adequate investigation of the management team.
11) In or der to pr ovide r easonable assurance the audit must be per for med w ith an
attitude of pr ofessional skepticism. W hich of the follow ing is most cor r ect r egar
ding the “attitude” of pr ofessional skepticism?
A) auditor s should assume that management is dishonest
B) auditor s should assume that management is neither dishonest nor honest
C) auditor s should assume that management is honest and mistakes ar e unintentional
D) auditor s should assume that management is incumbent in pr epar ing financial
statements
12) W hich of the follow ing is not one of the r easons that auditors pr ovide only
reasonable assur ance on the financial statements?
A) The auditor commonly examines a sample, r ather than the entir e population of tr
ansactions.
B) Accounting pr esentations contain complex estimates w hich involve uncer tainty.
C) Fr audulently pr epar ed financial statements ar e often difficult to detect.
D) A uditor s believe that r easonable assur ance is sufficient in the vast maj or ity of
cases.
13) W hich of the follow ing statements is most corr ect r egar ding er r or s and fr
aud?
A) An er r or is unintentional, w her eas fr aud is intentional.
B) Fr auds occur mor e often than er r or s in financial statements.
C) Er r or s ar e always fraud and fr auds ar e always er r or s.
D) A uditor s have mor e r esponsibility for finding fr aud than err or s.
14) W hen an auditor believes that an illegal act may have occurr ed, the auditor
should first:
A) inquir e o f management at a level above those likely to be involved.
B) consult w ith legal counsel of other s know ledgeable about t he illegal acts.
C) accumulate additional evidence.
D) w ithdraw fr om the engagement.
15) The auditor has no r esponsibility to plan and per for m the audit to obtain r
easonable assur ance that misstatements, w hether caused by err or s or fr aud, that ar
e not _ __ _ are detected.
A) impor tant to the financial statements
B) statistically significant to the financial statements
C) mater ial to the financial statements
D) id entified by the client
16) Fr audulent financial r epor ting is most likely to be committed by w hom?
A) line employees o f the company
B) outside member s of the company’s boar d of dir ector s
C) company management
D) the company’s auditor s
17) W hich of the follow ing w ould most likely be deemed a dir ect -effect illegal
act?
A) violation of feder al employment laws
B) violation of feder al envir onmental r egulations
C) violation of fed er al income tax law s
D) violation of civil r ights laws
18) The concept o f r easonable assur ance indicates that the auditor is:
A) not a guar antor of the cor r ectness of the financial statements.
B) not r esponsible for the fair ness of the financial statements.
C) r esponsible only for issuing an opinion on the financial statements.
D) r esponsible for finding all misstatements.
19) W hich of the follow ing is the auditor least likely to do w hen aw ar e of an
illegal act?
A) Discuss the matter w ith the client’s legal counsel.
B) Obtain evidence about th e potential effect of the illegal act on the financial
statements.
C) Contact the local law enfor cement officials r egar ding potential cr iminal wr
ongdoing.
D) Consider the impact of the illegal act on the r elationship w ith the company’s
management.
20) Auditing standar ds r equir e that an audit be designed to pr ovide r easonable
assurance of detecting:
A) mater ial err or s in the financial statements.
B) fr aud in the financial statements.
C) mater ial err or s and fr aud in the financial statements.
D) inadequate disclosur e in the notes to the financial statements.
Chapter 7: Audit Evidence

1) Auditor s must make decisions r egar ding w hat evidence to gather and how much
to accumulate. W hich of the follow ing is a decision that must be made by auditor s r
elated to evidence?
A)
Sample size Timing of audit pr ocedur es

Yes Yes
B)

No No
C)

Yes No
D)
No Yes
2) Audit pr ocedur es ar e concer ned w ith the natur e, extent, and timing in gathering
audit evidence. W hich, of the follow ing, is tr ue as to the timing of audit pr ocedur
es?
A)
Pr ior to the fiscal year -end of

the client Subsequent to the fiscal year -end
of the client
Yes Yes
B)

of the client
No No
C)

of the client
Yes No
D)

of the client
No Yes
3) Audit evidence has tw o pr imary qualities for the auditor ; r elevance and r
eliability. Gi ven the choices below which pr ovides the auditor w ith the most r
eliable audit evidence?
A) gener al ledger account balances
B) confir mation of accounts r eceivable balance r eceived fr om a customer
C) inter nal memo explaining the issuance of a cr edit memo
D) copy o f month-end adj usting entr ies
4) W hich of the follow ing is not a char acter istic of the r eliability of evidence?
A) effectiveness of client inter nal contr ols
B) ed ucation of auditor
C) indep endence of infor mation pr ovider
D) timeliness
5) The auditor must gather sufficient and appr opr iate evidence dur ing the cour se of
the audit. Sufficient evidence must:
A) be w ell documented and cr oss -r efer enced in the audit documents.
B) be based on sour ces that ar e exter nal to company.
C) pr ovide evidenc e that pr ove or dispr ove an audit obj ective/assertion.
D) be p er suasive enough to enable the auditor to issue an audit r eport.
6) Audit evidence obtained dir ectly by the auditor w ill not be r eliable if:
A) the auditor lacks the competence to evaluate the evidence.
B) it is pr ovided by the client’s attor ney.
C) the client denies its ver acity.
D) it is impossible for the auditor to obtain additional corr obor atory evi dence.
7) Appr opr iateness of evidence is a measur e of the:
A) quantity of evidence.
B) quality of evidence.
C) sufficiency of evidence.
D) meaning o f evidence.
8) W hich of the follow ing statements r egar ding the r elevance of evidence is cor r
ect?
A) T o be r elevant, evidence must per tain to the audit obj ective of the evidence.
B) To be r elevant, evidence must be per suasive.
C) T o be r elevant, evidence must r elate to multiple audit obj ectives.
D) T o be r elevant, evidence must be der ived fr om a system including effective i
nter nal controls.
9) Tw o deter minants of the per suasiveness of evidence ar e:
A) comp etence and sufficiency.
B) r elevance and r eliability.
C) appr opr iateness and sufficiency.
D) indep endence and effectiveness.
10) The tw o character istics of the appr opriateness of evidence ar e:
A) r elevance and timeliness.
B) r elevance and accur acy.
C) r elevance and r eliability.
D) r eliability and accur acy.
11) W hich of the follow ing for ms of evidence w ould be least per suasive in for
ming the auditor ‘s opinion about mar ketable secur ities and other investments held
by the company?
A) Responses to auditor ‘s questions by the pr esident and contr oller r egar ding the
investments account.
B) Cor r espondence w ith a stockbr oker r egar ding the quantity of client’s
investments held in str eet name by the br oker .
C) Minutes of the boar d of dir ector s author izing the pur chase of stock as an
investment.
D) The auditor ‘s count of mar ketable secur ities.
12) W hich of the follow ing statements is not corr ect?
A) It is possible to var y the sample size fr om one unit to 100% of the items in th e
population.
B) The decision o f how many items to test should not be influenced by the incr eased
costs of per for ming the additional tests.
C) Th e decision o f how many items to test must be made by the auditor for each
audit pr ocedur e.
D) The sample size for any given pr ocedur e is likely to vary fr om audit to audit.
13) For audit evidence to be compelling to the auditor it must be sufficien t and appr
opr iate. W hich statement below is not corr ect r egar ding the appr opr iateness of
audit evidence?
A) The mor e effective the inter nal contr ol system, the mor e assur ance it pr ovides
the auditor about the r eliability of financial r eporting by the clien t.
B) An auditor ‘s opinion, to be economically useful and pr ofitable to the auditing fir
m needs to be for med w ithin a r easonable time and based on evidence obtained that
assur es pr ofits for the auditing fir m.
C) Evidence obtained fr om independent sour ces outside the entity is gener ally mor e
r eliable than evidence secur ed solely w ithin the entity.
D) The independ ent auditor ‘s dir ect per sonal know ledge, obtained thr ough inquir
y, obser vation and inspection, is gener ally mor e per suasive than infor mation
obtained indir ectly.
14) W hich one of the follow ing is not one of the pr imar y pur poses of audit
documentation pr epar ed by the audit team?
A) A basis for planning the audit.
B) A r ecor d of the evidence accumulated and the r esults of the tests.
C) A basis for r eview by super visor s and partners.
D) A basis for deter mining w or k deficiencies by peer r eview teams.
15) W hich of the follow ing is the most obj ective type of evidence?
A) A letter wr itten by the client’s attor ney discussing the likely outcome of
outstanding law suits.
B) The physical count of secur ities and cash.
C) Inquir ies of the cr edit manager about the collectability of noncur r ent accounts r
eceivable.
D) Obser vation of cobw ebs on some inventory bins.
16) Due professional car e, the third general standard, is concerned with what is done
by the independent auditor and how w ell it is done. For example, due car e in the
matter of audit documentation requires that audit documentation of the evidence
gather ed by the auditor meets which of the following criteria?
A) W or kpaper s be indexed to the gen er al ledger accounts and include both a
permanent file and a gener al file.
B) The content be sufficient to pr ov ide support for the auditor’s opinion, including
the auditor’s repr esentation as to compliance w ith auditing standar ds.
C) Audit evidence is pr incipally gather ed to deter mine if the client’s financial
statements, as pr epar ed by management, can be r elied upon to make manager ial
decisions about the fir m.
D) A udit evidence as displayed in the w or kpaper s is pr imar ily per for med to pr
otect the auditing fir m in the case of a law suit by investor s.
17) W hich items affect the sufficiency of evidence w hen choosing a sample?
A)
Selecting items w ith a high
likelihood o f misstatement The r andomness of the items
selected
Yes Yes
B)
selected
No No
C)

selected
Yes No
D)

selected
No Yes
18) Deter mine w hich of the follow ing is most cor r ect r egar ding the r eliability of
audit evidence.
A) Infor mation that is indir ectly obtained fr om exter nal sources is the most r eliable
audit evidence.
B) Reliability of audit evidence is dep endent upon the evidence being convincing.
C) R eliability of evidence r efer s to the amount of evidence obtained.
D) An effective inter nal contr ol system pr ovides mor e r eliable audit evidence.
19) Evidence is gener ally consider ed appr opr iate w hen:
A) it has been obtained by random selection.
B) ther e is enough of it to affor d a r easonable basis for an opinion on financial
statements.
C) it has the qualities of being r elevant, obj ective, and fr ee fr om know n bias.
D) it consists of w r itten statements made by managers of the enter pr ise under audit.
20) Given the economic and time constr aints in w hich auditors can collect evidence
about management assertions about the financial statements, the auditor nor mally
gather s evidence that is:
A) ir r efutable.
B) conclusive.
C) p er suasive.
D) completely convincing.
Chapter 8: Audit Planning and Analytical Procedures
1) A measur e of how w illing the auditor is to accept that the financial statements
may be mater ially misstated after the audit is com pleted and an unqualified opinion
has been issued is the:
A) inher ent r isk.
B) acceptable audit risk.
C) statistical r isk.
D) financial risk.
2) A measur e of the auditor ‘s assessment of the likelihood that ther e ar e mater ial
misstatements in an account befor e consider ing the effectiveness of the cl ient’s inter
nal contr ol is called:
A) contr ol r isk.
B) acceptable audit risk.
C) statistical r isk.
D) inher ent r isk.
3) W hen inher ent r isk is high, ther e will need to be:
A)
A low er assessment of audit r isk Mor e evidence accumulated by the auditor
Yes Yes
B)

No No
C)

Yes No
D)

No Yes
4) In w hat or der should the follow ing steps occur ?

A. assess client business risk
B. under stand the client’s business and industr y
C. per for m pr eliminary analytical pr ocedur es
D. assess acceptable audit r isk
A) D, B , C, A B) B, A, D, C C) B , D, A , C D) D, C, B , A
5) The auditor uses know ledge gained fr om the under standing of the client’s
business and industr y to assess:
A) client business r isk. B) contr ol r isk. C) inher ent r isk. D) audit r isk.
6) Ther e ar e thr ee main r easons why an auditor should pr oper ly plan audit
engagements. Discuss each of these r easons.
7) When an auditor decides ther e is higher inher ent r isk for an account, one
potential effect is that mor e audit evidence w ill be r equir ed for that account.
A) Tr ue
B) False
8) As acceptable audit r isk is decr eased, the likely cost of conducting an audit incr
eases.
A) True
B) False
9) Acceptable audit r isk is a measur e of the auditor ‘s w illingness to accept that the
financial statements do not contain mater ial misstatements after the audit is
completed and a qualified audit r epor t has been issued.
A) Tr ue B) False
10) Tw o maj or factor s that affect acceptable audit r isk ar e the likely user s of the
financial statements and the likelihood o f issuing an unqualified audit opinion.
A) Tr ue
B) False
11) One of the pur poses o f an engagement letter is to avoid misunder standings w ith
the client. This is impor tant for :
A)
Good client r elations Facilitating high-quality w or k at a

r easonable cost
Yes Yes
B)

r easonable cost
No No
C)

r easonable cost
Yes No
D)

r easonable cost
No Yes
12) The auditor is likely to accumulate mor e evidence w hen the audit is for a
company:
A)
W hich has lar ge amounts of debt W hich is to be sold in the near futur e
Yes Yes
B)
No No
C)
Yes No
D)
No Yes
13) Initial audit planning involves four matter s. W hich of the follow ing is not one o
f these?
A) Develop an over all audit str ategy.
B) Request that bank balances be confir med.
C) Sched ule engagement staff and audit specialists.
D) Identify the client’s r eason for the audit.
14) Rodger s CPA has r equested per mission to communicate w ith pr edecessor
auditor in or der to r eview cer tain w or kpaper s for high r isk accounts for a new
audit client. The new audit clients r efusal to allow this communication to occur w
ould impact Rodger s decision concerning:
A) the auditor ‘s ability to design audit tests.
B) possible scope exc eption due to lack of access.
C) int egr ity of management concer ning possible accounting misstatements.
D) violation of the GA AP r ules concer ning consistency and comparability of
financial infor mation.
15) A successor auditor may per for m w hich of the follow ing for a new audit client?
A)
Speak to local attorneys, banks and other
businesses r egar ding the company’s r eput ation Speak to the pr edecessor auditor s
about
disagr eements they had w ith management
Yes Yes
B)

businesses r egar ding the company’s r eputation Speak to the pr edecessor auditor s
about
No No
C)

about
Yes No
D)

about
No Yes
16) W hich of the follow ing is not cor r ect r egar ding an auditor ‘s decision that a
low er acceptable audit r isk is appr opr iate?
A) Mor e evidence is accumulated.
B) Less evidenc e is accumulated.
C) Sp ecial car e is r equir ed in assigning exper ienced staff.
D) Review of audit documentation is per formed by per sonnel not assigned to the
engagement.
17) A w r itten under standing detailing w hat the auditors w ill do in deter mining if
the financial statements ar e fair r epr esentations of the company’s financial
statements and w hat the auditor expects fr om the client in per for ming an audit w ill
nor mally be expr essed in the:
A) management letter r equested by the auditor .
B) enga gement letter .
C) Audit Plan.
D) A udit Str ategy for the client.
18) If an auditor is r equested to per for m nonaudit ser vices for a public company
audit client, w ho is r esponsible for agr eeing to those ser vices w ith the audit fir m?
A) the client’s management
B) the client’s chief executive officer
C) the client’s chief financial officer
D) the client’s audit committee
19) W hich of the follow ing statements is tr ue r egar ding communications betw een
pr edecessor and successor auditors?
A) The bur den of initiating the communication r ests w ith the pr edecessor .
B) The pr edecessor ‘s r esponse can be limited to stating that no infor mation w ill be
pr ovided.
C) Th e pr edecessor should communicate w ith the successor only if the client is
public.
D) Ther e must be communication betw een the pr edecessor and successor if the
successor is to accept the engagement.
20) The pur pose o f an engagement letter is to:
A) d ocument the CPA fir m’s r esponsibility to external users of the audited financial
statements.
B) document the ter ms of the engagement.
C) notify the audit staff of an upcoming engagement so that per sonnel scheduling can
be facilitated.
D) emphasize management’s r esponsibility for appr oving the audit pr ogr am.
Chapter 9: Materiality and Risk

1) If it is pr obable that the j udgment of a r easonable per son w ill be changed or
influenced by the omission or misstatement of infor mation, then that infor mation is,
by definition of FAS B Statement No. 2:
A) mater ial.
B) insignificant.
C) significant.
D) r elevant.
2) The scope par agr aph of the standar d unqualified auditor ‘s r epor t states that “…
the standar ds r equir e that w e plan and per for m the audit to obtain __ _ _ assurance
about w hether the financial statements ar e fr ee of mater ial misstatement”. W hat t
ype of assurance is given?
A) immediate
B) limited
C) r easonable
D) absolute
3) Auditor s ar e r esponsible for deter mining w hether financial stat ements ar e
mater ially misstated, so upon discover ing a mater ial misstatement they must bring it
to the attention of:
A) r egulator s.
B) the audit fir m’s managing partner .
C) the client shar eholder s.
D) the client’s management.
4) The FASB definition of mater iality focuses on potential users of financial

statements.
A) Tr ue
B) False
5) Audit standar ds r equir e the auditor to consider mater iality ear ly in the audit. W
hich statement(s) r egar ding pr eliminar y materia lity ar e tr ue?
I. Pr eliminary mater iality may change dur ing the engagement.
II. Pr eliminary mater iality is the maximum amount the auditor by which the auditor
believes the financials could be misstated and still not affect the decisions of r
easonable users .
A) I only
B) II only
C) both I and II
D) neither ar e tr ue
6) W hy do auditors establish a pr eliminar y j udgment about mater iality?
A) T o deter mine the appr opr iate level of staff to assign to the audit.
B) So that the client can know w hat r ecor ds to make available to the auditor .
C) T o plan the appr opr iate audit evidence to accumulate and develop an over all
audit strategy.
D) T o finalize t he contr ol r isk assessment.
7) If an auditor establishes a r elatively high level for mater iality, then the aud itor w
ill:
A) accumulate mor e evidence than if a low er level had been set.
B) accumulate less evidence than if a low er level had been set.
C) accumulate appr oximately the same evidence as w ould be the case w er e mater
iality lower .
D) accumulate an undeter m ined amount of evidence.
8) The pr eliminary j udgment about materiality and the amount of audit evidence
accumulated ar e
___ _ r elated.
A) dir ectly
B) indir ectly
C) not
D) inver sely
9) W hich of the follow ing is the pr imar y basis used to decide mater iality for a for -
pr ofit entity?
A) net sales
B) net assets
C) net income befor e tax
D) all o f the above
10) Auditing standar ds _ _ __ that the basis used to deter mine the pr eliminary j
udgment about mater iality be documented in the audit files.
A) p er mit
B) do not allow
C) r equir e
D) str ongly encour age
11) Amounts involving fr aud ar e usually consider ed ___ _ important than
unintentional err or s of equal dollar amounts.
A) less B) no l ess C) no mor e D) mor e
12) Qualitative factor s can affect an auditor’s assessment of mater iality. W hich of
the follow ing qualitative factor s could influence the assessment of mater iality?
I. Misstatements that ar e otherw ise immaterial may be mater ial if they affect ear
nings tr ends.
II. Minor misstatements r esulting fr om the consequences o f contr actual obligations.
A) I only
B) II only
C) I and II
D) neither I nor II
13) The five steps in applying mater iality ar e listed below in r andom or der .
1. Estimate the combined misstatement.
2. Estimate the total misstatement in the segment.
3. Set pr eliminary j udgment about materiality.
4. Allocate pr eliminary j udgment about materiality to segments.
5. Compar e combined estimate w ith pr eliminar y j udgment about mater iality. The
fir st thr ee steps in corr ect sequence w ould be:
A) 1, 2, 5
B) 3, 4, 2
C) 2, 1, 5
D) 3, 2, 4
14) W hich of the follow ing statements is not corr ect?
A) Mater iality is a r elative rather than an absolute concept.
B) The most impor tant base used as the cr iter ion for deciding mater iality is total
assets.
C) Qualitative factors as w ell as quantitative factor s affect mater iality.
D) Given equal dollar amounts, fr auds ar e usually consider ed mor e impor tant than
er r or s.
15) Cer tain types of misstatements ar e likely to be mor e impor tant than other types
to user s, even if the dollar amounts ar e the same. W hich of the follow ing demonstr
ates this?
A)
Amounts involving fr auds ar e

consider ed mor e impor tant than er r or s of equal amount Misstatements that ar e
otherw ise
immater ial may be mater ial if they affect a tr end in ear nings
Yes Yes
B)

otherw ise
No No
C)
Amounts involving fr a uds ar e

otherw ise
Yes No
D)

otherw ise
No Yes
16) W hen setting a pr eliminary j udgment about mater iality:

A) mor e evidence is r equir ed for a low dollar amount than for a high dollar amount.
B) less evidence is r equir ed for a low dollar amount than for a high dollar amount.
C) the same amount of evidence is r equir ed for either low or high dollar amounts.
D) ther e is no r elationship betw een it and the dollar amount of evidence needed .
17) Lew is Cor por ation has a few lar ge accounts r eceivable that total one million
dollar s w her eas
Clar k Cor por ation has many small accounts r eceivable that total one million dollar
s. Misstatement in any one account is mor e significant for Lew is cor por ation
because of the concept o f:
A) Mater iality. B) Audit r isk. C) R easonable assur ance. D) Compar ative analysis.
18) Mater ial misstatement is the magnitude of misstatement that makes a r easonable
per son either change their mind or be influenced by the misstatement. Audit standar
ds r equir e the auditor to consider the combined amount of misstatement ear ly in the
audit. This is know n as pr eliminary mater iality j udgment. List and discuss the thr
ee main factor s that affect an auditor’s pr eliminar y j udgment about mater iality.
19) Du e to qualitative factors, cer tain types of misstatements ar e likely to be mor e
important to users than other s, even if the dollar amounts ar e the same. Identi fy tw o
qualitative factor s that might significantly affect an auditor ‘s mater iality j udgment,
and give an example of each.
20) The auditor ‘s pr eliminary j udgment about materiality is the maximum amount
by w hich the auditor believes the financial statements could be misstated and still not
affect the decisions of r easonable user s.
A) Tr ue
B) False
Chapter 10: Section 404 Audits of Internal Control and Control Risk
1) Which of the following is not one of the three primary objectives of effective
internal control?
A) reliability of financial reporting
B) efficiency and effectiveness of operations
C) compliance with laws and regulations
D) assurance of elimination of business risk
2) The Public Company Accounting Oversight Board states that reasonable assurance
allows a:
A) small likelihood of ineffective internal controls.
B) remote likelihood that material misstatements will not be prevented or detected by
internal control.
C) likelihood that material misstatements will not be prevented or detected by internal
control.
D) high likelihood that material misstatements will not be prevented or detected by
internal control.
3) Which of the following is most correct regarding the requirements under Section
404 of the Sarbanes
Oxley Act?
A) The audits of internal control and the financial statements provide reasonable
assurance as to misstatements.
B) The audit of internal control provides absolute assurance of misstatement.
C) The audit of financial statements provides absolute assurance of misstatement.
D) The audits of internal control and the financial statements provide absolute
assurance as to misstatements.
4) Which of management’s assertions with respect to implementing internal controls
is the auditor primarily concerned?
A) efficiency of operations
B) reliability of financial reporting
C) effectiveness of operations
D) compliance with applicable laws and regulations
5) To issue a report on internal control over financial reporting for a public company,
an auditor must:
A) evaluate management’s assessment process.
B) independently assess the design and operating effectiveness of internal control.
C) evaluate management’s assessment process and independently assess the design
and operating
effectiveness of internal control.
D) test controls over significant account balances.
6) A company frequently sells products at a price below inventory cost. Essential
controls in the risk assessment process would include:
A) adequate controls that address the risk of overstating inventory.
B) adequate controls that address the risk of not including a purchased item in
inventory.
C) adequate controls that address the risk of understatement of inventory.
D) adequate controls that address the risk of overstatement of cost of goods sold.
7) Internal controls are not designed to provide reasonable assurance that:
A) all frauds will be detected.
B) transactions are executed in accordance with management’s authorization.
C) access to assets is permitted only in accordance with management’s authorization.
D) company personnel comply with applicable rules and regulations.
8) Describe each of the three broad objectives management typically has for internal
control. With which of these objectives is the auditor primarily concerned?
9) The Sarbanes-Oxley Act of 2002 requires that public companies issue an internal
control report.
A) True
B) False
10) The primary emphasis by auditors when evaluating and testing internal control is
on controls over classes of transactions rather than controls over account balances.
A) True B) False
11) Which of the following is responsible for establishing a private company’s
internal control?
A) Senior Management
B) Internal Auditors
C) Senior Management and auditors
D) Audit committee
12) Two key concepts that underlie management’s design and implementation of
internal control are:
A) costs and materiality.
B) absolute assurance and costs.
C) inherent limitations and reasonable assurance.
D) collusion and materiality.
13) The PCAOB places responsibility for the reliability of internal controls over the
financial reporting process to:
A) the company’s board of directors.
B) the audit committee of the board of directors.
C) the CEO and the CFO.
D) the CFO and the Independent Auditors.
14) Which of the following parties provides an assessment of the effectiveness of
internal control over financial reporting for public companies?
A)
Management Financial statement auditors
Yes Yes
B)
No No
C)
Yes No
D)
No Yes
15) An act of two or more employees to steal assets and cover their theft by misstating
the accounting records would be referred to as:
A) collusion.
B) a material weakness.
C) a control deficiency.
D) a significant deficiency.
16) Sarbanes-Oxley requires management to issue an internal control report that
includes two specific items. Which of the following is one of these two requirements?
A) A statement that management is responsible for establishing and maintaining an
adequate internal control structure and procedures for financial reporting.
B) A statement that management and the board of directors are jointly responsible for
establishing and maintaining an adequate internal control structure and procedures for
financial reporting.
C) A statement that management, the board of directors, and the external auditors are
jointly responsible for establishing and maintaining an adequate internal control
structure and procedures for financial reporting.
D) A statement that the external auditors are solely responsible.
17) When management is evaluating the design of internal control, management
evaluates whether the control can do which of the following?
A)
Detect material misstatements Correct material misstatements
Yes Yes
B)
No No
C)
Yes No
D)
No Yes
18) When one material weakness is present at the end of the year, management of a
public company must conclude that internal control over financial reporting is:
A) insufficient. B) inadequate. C) ineffective. D) inefficient.
19) The auditors primary purpose in auditing the client’s system of internal control
over financial reporting is:
A) to prevent fraudulent financial statements from being issued to the public.
B) to evaluate the effectiveness of the company’s internal controls over all relevant
assertions in the financial statements.
C) to report to management that the internal controls are effective in preventing
misstatements from appearing on the financial statements.
D) to efficiently conduct the Audit of Financial Statements.
20) Management must disclose material weaknesses in internal control in its audit
report:
A) whenever the weakness is deemed significant to a single class of transactions.
B) whenever the weakness is significant to overall financial reporting objectives.
C) if the weakness exists at the end of the year.
D) only if the auditor identifies the weakness as significant.

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Chapter 1: The Demand for Audit and Other Assurance Services

Chapter 2: The CPA Profession

Chapter 3: Audit Reports

Garrett and Brown, CPAs March, 2013

Chapter 4: Professional Ethics

Honor the public tr ust Ser ve the client’s inter est

Honor the public tr ust Ser ve the client’s inter est

Honor the public tr ust Ser ve the client’s inter est

Employees Shar eholders

Employees Shar eholders

Employees Shar eholders

Employees Shar eholders

Chapter 5: Legal Liability

Punitive damages Compensatory damages

Punitive damages Compensatory damages

Chapter 6: The CPA Profession

Issue an adver se audit r epor t Issue a qualified audit r epor t

Issue an adver se audit r epor t Issue a qualified audit r epor t

Issue an adver se audit r epor t Issue a qualified audit r epor t

Issue an adver se audit r epor t Issue a qualified audit r epor t

Chapter 7: Audit Evidence

Sample size Timing of audit pr ocedur es

Sample size Timing of audit pr ocedur es

Sample size Timing of audit pr ocedur es

Pr ior to the fiscal year -end of

Pr ior to the fiscal year -end of

Pr ior to the fiscal year -end of

Pr ior to the fiscal year -end of

Selecting items w ith a high

Selecting items w ith a high

A low er assessment of audit r isk Mor e evidence accumulated by the auditor

A low er assessment of audit r isk Mor e evidence accumulated by the auditor

A low er assessment of audit r isk Mor e evidence accumulated by the auditor

4) In w hat or der should the follow ing steps occur ?

Good client r elations Facilitating high-quality w or k at a

Good client r elations Facilitating high-quality w or k at a

Good client r elations Facilitating high-quality w or k at a

Good client r elations Facilitating high-quality w or k at a

Speak to local attorneys, banks and other

Speak to local attorneys, banks and other

Speak to local attorneys, banks and other

Chapter 9: Materiality and Risk

4) The FASB definition of mater iality focuses on potential users of financial

Amounts involving fr auds ar e

Amounts involving fr auds ar e

Amounts involving fr a uds ar e

Amounts involving fr auds ar e

16) W hen setting a pr eliminary j udgment about mater iality:

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